World stocks inch higher on hopes that Greek voters will keep the euro

View full sizeDaniel Ochoa de Olza / APSpanish bank Bankia's share values are displayed on screens at the Stock Exchange in Madrid on Monday. Shares in Spanish bank Bankia, one of the banks hardest hit by Spain's real estate collapse over the past four years, fell 28 per cent on opening Monday, the bank's first day back on the stock exchange following its announcement Friday that it would need Euro 19 billion ($23.8 billion) bailout to bolster its defenses.

BANGKOK (AP) — World stock markets inched higher Monday after opinion polls in Greece suggested the country might stick with austerity and stay in the euro common currency. Meanwhile, Spanish officials insisted that the country’s banking sector will not need an international rescue.

The likelihood of Greece leaving the euro has been growing steadily since early May, when political parties opposed to the harsh terms of the country’s financial rescue received unexpectedly high support.

But surveys over the weekend showed that Greeks, while angry after more than two years of austerity measures that have produced lower pensions and higher taxes, still want Greece to keep the euro currency and not revert back to the drachma. The May election results were so splintered that it left the country without a coalition government. Another election has been set for June 17.

In Spain, Conservative Prime Minister Mariano Rajoy insisted Monday that the country’s banking sector would not need an international rescue as concern over the bailout of nationalized lender Bankia sent its stock price plummeting while Spain’s borrowing costs soared. “There will be no rescue of the Spanish banking sector,” Rajoy told a press conference.

However, he added that the government had no choice but to bail out Bankia which has been crippled by Spain’s real estate collapse. “We took the bull by the horns because the alternative was collapse,” said Rajoy, stressing that Bankia clients’ savings were now safer than ever.

Bankia, Spain’s fourth-largest bank, is estimated to have (euro) 32 billion in toxic assets and was effectively nationalized earlier this month when the government converted (euro) 4.5 billion in rescue funds it gave last June into shares.

The lender’s shares fell 28 per cent on opening in Madrid on Monday — Bankia’s first day back on the stock exchange following its announcement Friday that it would need the (euro) 19 billion ($23.8 billion) in state aid to shore itself up against its bad loans, a far bigger bailout than expected. The shares, which recovered slightly by midday to trade 13 percent down at (euro) 1.36, had closed at (euro) 1.57 before trading was suspended Friday.

Bank of Spain estimates show Spain’s lenders are sitting on some (euro) 180 billion ($233 billion) in assets that could cause them losses. The government fears the cost of rescuing the country’s vulnerable banks could overwhelm its own finances, which are already strained by a double-dip recession and an unemployment rate of nearly 25 percent, and force it to seek a rescue by the rest of Europe.

On Monday, Spain’s interest rate, or yield, for 10-year bonds on the secondary market — a key indicator of market confidence — was up 13 basis points by midday to 6.42 percent. However, Rajoy said this had more to do with Europe and worries over Greece and dismissed suggestions it had anything to do with Bankia.

A rate of 7 percent is considered unsustainable over the long term and there is concern that Spain might soon be pushed join the ranks of Greece, Ireland and Portugal and seek an international bailout.

In mainland China, the Shanghai Composite Index climbed 1.2 percent to 2,361.37 and the smaller Shenzhen Composite Index shot up 1.4 percent to 948.42. Benchmarks in Singapore, Taiwan and Indonesia also rose. South Korean markets were closed for a public holiday.

Ric Spooner, chief market analyst at CMC Markets in Sydney, said it made sense for investors to remain subdued this far ahead of Greece’s election. “The response has so far been very muted because these things could easily wax and wane over the course of the next two weeks,” said Spooner. “One of the key drivers for investors will be trying to assess what the outcome of Greek election may be.”

Later in the week, the U.S. government will release employment data for May, while China will release monthly manufacturing data. A private survey last week showed activity weakened further in May.

Even good results might not be enough to embolden investors spooked at the possibility that austerity-weary Greece could refuse to take steps necessary to get the next installment of a loan to prevent bankruptcy. That could lead to a massive debt default, Greece’s exit from the euro and financial chaos.

“The situation in Greece as it currently stands probably skews risk to the downside,” CMC’s Spooner said. “It’s difficult to be too aggressive with the Greece situation looming. Greece does sort of override all of this.”

Debt-mired Greece has been kept solvent since May 2010 through loans from the European Union and the International Monetary Fund. A first bailout package of 110 billion euros ($138 billion) was agreed in May 2010 and a second, 130 billion euros deal was approved in March 2012. A separate deal with private creditors earlier this year allowed Greece to write off nearly 107 billion euros of its 368 billion euro debt.